Exporters to China face credit perils

There’s a saying in China a good businessman is one who pays late. That’s not what the growing number of Australian businesses that sell goods and services to China want to hear.

While China’s economy continues to grow at a steady pace, credit insurance agency Coface has warned about the perils of doing business in China.

“You can have a very dynamic country, but a local business environment that is not so favourable," says Singapore-based regional risk director Christophe Souquet.

Coface rates every country on earth’s business climate to assess their credit risk, using a seven-notch system. China is ranked B – the third lowest – trailing Australia and Singapore, which have the highest rankings in Asia, of A1. Thailand, Taiwan, South Korea and rival superpower India all rank ahead of China.

“There’s been a general improvement in terms of overdue payments. But, nevertheless, there are old bad habits coming back in that a large number of overdue payments and defaults are due to internal corporate issues such as lack of management and internal structures, disputes and corruptions," says Souquet.

Coface’s extensive analysis provides a window into an economy that remains somewhat of a black box because of the lack of credible data on economic and business activity.

Souquet says appreciating the objectives of China’s central government is key in understanding its business climate.

“To understand China you have to acknowledge the government’s major concern in social instability. They will do everything to manage the inflation that will impact the level of standard of the people in China," he says.

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Souquet says rising costs will intensify pressures on uncompetitive Chinese companies squeezing margins. It could see an increase in Chinese corporate failures.

A tightening on bank lending to tackle in inflation after an era of easy credit could pose a further threat.

“The major banks progressive withdrawal of [stimulus] might pressure companies with lower margins that are less competitive. We are concerned by this that there might be more payment defaults and bankruptcies because of this situation," says Souquet.

While China’s largest lenders have the backing of the state, which has the ability to capitalise them in the event that sour loans inflict losses, loose lending needs to be monitored among smaller lenders.

“There are a lot of local and provincial banks that have a lot of loans. There’s over-liquidity and a lot of projects that go nowhere. So the question is which banks will be would be supported by the governments?"

Souquet says the number of state-backed companies has fallen by half as the Chinese government has moved to support only key industries, adding to the risks of doing business in China.

The majority of Coface’s Australian clients hail from the agricultural, manufacturing or steel industries.

“The biggest observation of Australia is that most of the business is concentrated in one or two major sectors of activities," says Souquet.

He has a word of warning for Australia. China is keen to promote domestic industries and over time will look to reduce its reliance on exports in key industries. If the economy hopes to ride the coat-tails of Chinese growth then It’s then time to diversify.

“There’s a lot of opportunities in other sectors for instance services are developing very quickly in China. Online retail didn’t exist a few years ago but in 2012 it might represent 5 per cent of total retail sales. There are 450 million internet users," he says.

“Western companies still have the technological skills advantage over China."